Oct. 16 (Bloomberg) -- Jefferies Group Inc. had its credit
rating cut to one level above junk by Moody’s Investors Service,
which cited concern that the New York-based investment bank may
struggle to manage risk after its expansion.

Jefferies was reduced to Baa3, the lowest investment grade,
from Baa2, the ratings firm said today in a statement.

“Since the onset of the financial crisis in 2007,
Jefferies has grown significantly and opportunistically,”
Moody’s said. “This growth also introduces risks as the firm
integrates the people and operations that it has acquired, and
establishes long-term discipline around risk-taking.”

The firm, run by Chief Executive Officer Richard Handler,
51, for more than a decade, has boosted headcount by 68 percent
since 2008 to more than 3,800 as bigger rivals contracted in the
wake of the financial crisis. Handler has said the firm is
focusing on transparency and managing risk after the collapse of
MF Global Holdings Ltd. last year fueled investor concern that
Jefferies might be hurt by Europe’s market turmoil.

“Being a mid-sized firm has enabled Jefferies’s most
senior management to remain highly engaged” in risk management,
Moody’s said. “As the firm continues on its growth path, the
ability of its senior leaders to remain as highly involved will
diminish.”

‘Inherent’ Risks

Moody’s has downgraded more than a dozen of the world’s
biggest banks, including Credit Suisse Group AG, Morgan Stanley
and Citigroup Inc., this year amid an industrywide review of
firms with significant capital-markets operations. Risks of
outsized losses are “inherent” in that business, Moody’s said
in June.

Richard Khaleel, a spokesman for Jefferies, declined to
comment.

The ratings company said Jefferies avoided key risk-management missteps during its expansion. “The firm has kept
leverage down, avoided costly acquisitions and has generally
shied away from illiquid, concentrated positions,” helping it
maintain a less complex balance sheet than larger competitors,
Moody’s said.

Jefferies, which is about 1/28th the size of Goldman Sachs
Group Inc., more effectively avoided trading losses this year
than larger Wall Street rivals. The company said it had trading
losses on three days for the first nine months of its fiscal
year, according to company filings. That compares with 29 days
at New York-based JPMorgan Chase & Co. and 19 days at Morgan
Stanley in the first six months of 2012.

Jefferies’s net exposure to sovereign issuers,
corporations, financial institutions and structured products in
Greece, Ireland, Italy, Portugal and Spain was negative $20.4
million at the end of August, the firm said in a filing last
week. That figure decreased from a net short of $125.4 million
on May 31.